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A Potential for Blood-letting: The Week Ahead

March 2nd, 2008 Michael McDonough
This week has some serious downside potential… Lets take a look at some of the more important indicators, and see which direction we think the risk lies verse expectations.

Monday:
10:00AM: ISM Mfg. Index (Risk: Downside)- Currently, the market expects a reading of 48.1, verse 50.1 from the prior month. We believe given the poor performance of the regional surveys (Philly & NY Fed) and consumer confidence we could see some downside risk to the markets expectations. At the same time, it will be very important to look at the new orders and prices paid sub-component of the report. New orders tends to be a rather good forward looking indicator for the index, and of course prices paid will tie in heavily to current inflation concerns. Bottom line, we could see a strong headline number and still see the market catch a bid, or vice versa based on these sub-components.

10:00AM: Construction Spending (Risk: Downside)- The market is anticipating a 0.7%m/m decline in construction spending. The reason we see a downside risk to this indicator is because housing related indicators have continue to decline, and the most recent Senior Loan Officer Survey indicated a further tightening to lending standards. This data will, despite its importance, likely take a back seat to the ISM report being released at the same time. This release will most strongly be felt in the homebuilder stocks (ex. ETF: ITB). This indicator also tends to be a good indicator of the effectiveness of Fed Policy.

Tuesday:
None

Wednesday:
8:15AM: ADP Employment Report (Risk: Neutral)- Not much I can say about this, other than it will set the mood for Friday’s Non-farm release, and get a lot of media attention. If this release were to come in higher than expectations we could see a slight rally in the market. However, the inverse is true as well. Currently, the market wants to see news that would support a rate cut, but at the same time not signal an imminent recession.

8:30AM: Productivity and Costs (Risk: Neutral)- We do not expect many changes from the previous number. However, pay attention to any outliers as it will affect the market.

10:00AM: Factory Orders (Risk: Neutral)- The market is currently expecting a reading of -2.5%, based on the recent weakness in durable good orders. We feel this expectation prices the weakness in durable goods in fairly well. This would be the first decline in factory orders in 5 months.

10:00AM: Non-Manufacturing ISM (Risk: Neutral/Slight Upside)- The markets expects Non-Manufacturing ISM to come in at 47.5, after falling to 44.6 last month from well above 50. Though not as important as the manufacturing ISM, this indicator is starting to garner more attention. However, we do not believe this indicator will be enough to turn-around market sentiment if the week plays out as we are expecting.


Thursday:
8:30AM: Jobless Claims (Risk: Neutral)- We believe the initial claims number will remain above 350K, with the 4wk moving average continuing to edge up. This is bad news for the market. Initial jobless claims tend to be one of the best forward looking indicators at predicting a recession. A number below 350K tends to be safe, and above that level the probability of a recession increases dramatically.

Friday: The Main Event!
8:30AM: Employment Report (Risk: Negative)- Currently, the market anticipates an unemployment reading of 5.0% (vs. 4.9%) and an increase in non-farm payrolls of 25K. However, given the recent weak performance in initial claims we believe February’s number has the potential to disappoint. We will further clarify our view once we see this week’s jobless claims data and the ADP report.

Conclusion:
The bottom line is we expect another volatile week of trading without much upside. However, we could see another good buying opportunity come the end of the week. We believe once the market comes to a consensus on whether there will be or not be a recession in the US a lot of the volatility caused by uncertainty will be taken out of the markets and we may start to see the beginning of a sustainable recovery, of course the recovery would be quicker given the latter scenario.

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